In a new paper 'Do we need regulation of bank capital?' the Institute of Economic Affairs' argues that relatively new moves towards bank capital regulation are counter productive. Banks are best placed to decide what capital levels they require, rather than regulators. A much better change to bank regulation would be to move towards developing systems that allow banks to be wound up when they fail.
The threat of failure that would see banks act more prudently, as currently implicit state backing is responsible for much of the excessive risk taking in the banking sector.
Commenting on the paper, Prof. Philip Booth, the Editorial Director at the Institute of Economic Affairs, said:
We still need to learn the lessons of the last financial crash. Banking is inherently risky and from time-to-time banks will fail. Great swathes of complex capital regulation made banking riskier and less transparent.
The insistence on ever-increasing regulation of UK banks is simply encouraging gaming of the system. The best way to ensure banks accurately assess risk is to create a system so banks can fail in an orderly fashion. The requirement of the UK government for banks to hold more capital is damaging the economy. It also suggests that the government does not believe its own rhetoric when it says that new regulations will enable failing banks to be wound up at no cost to the taxpayer.